April 12, 2023
The debate over a 25bp May rate hike is less important than the disconnect between Fed rhetoric and market expectations for back-half rate cuts. Fed officials continue to endorse a hike and hold policy into year-end, while markets remain priced for nearly 50bp of rate cuts. Leading indicators and high frequency data all point to slower growth ahead, but justification for a Fed pivot will likely have to come from further easing in tight labor markets. Last week’s March payroll data showed slower job creation and cooling wage growth, but the Fed will wait for more. Recessions usually start with an external shock or Fed policy, but all share a negative feedback loop between jobs, credit, consumer spending, corporate earnings and back again. Stopping that feedback loop requires monetary accommodation and expanding money supply.
Rotation: The early-March peak in 10-year bond yields started a rotation into growth from value sectors. That rotation has recently stalled with 10-year yields still hovering near their 200-day moving average at 3.49% and above a small cluster of support in the 3.20%-3.30% range. We expect the rotation into growth sectors will gain strength on a break in 10-year yields below 3.20%. Tech is our preferred growth sector and is most sensitive to changes in 10-year real yields. Ten year real yields also peaked in early March at +166bp and now sit at +115bp. Sustained levels below +108bp would result in increased rotation into Tech with the Nasdaq 100 (NDX) outperforming other major benchmarks. The S&P 500 would also benefit from an accelerated rotation into growth sectors, but faces significant technical resistance below 4200. In our opinion, a break above 4200 requires a change in macro fundaments or an imminent Fed pivot. Macro data continues to point to a slowdown and the yield curve has yet to signal an imminent pivot.